Risk Management & Insurance Fundamentals Flashcards
7 cards from real GAP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management & Insurance Fundamentals flashcards as text
Which insurance concept ensures that the insured has a financial stake in the property being insured?
Answer: Insurable interest
Insurable interest requires that the policyholder would suffer a genuine financial loss if the insured property is damaged or destroyed.
In risk management, 'frequency' of loss refers to:
Answer: How often a particular loss event is expected to occur
Loss frequency measures how often a specific type of loss is likely to occur within a given period.
A consumer finances a new vehicle with a 84-month loan and no down payment. This scenario creates elevated GAP exposure primarily because:
Answer: Longer loan terms mean slower principal payoff relative to rapid early depreciation
With 84-month loans, early payments are heavily interest-laden, so loan balances drop slowly while vehicle value depreciates rapidly, widening the gap.
Which term describes the process by which an insurer, after paying a claim, acquires the insured's legal right to pursue recovery from a responsible third party?
Answer: Subrogation
Subrogation allows the insurer to 'step into the shoes' of the insured and recover loss amounts from the at-fault party.
When a primary insurer pays a total loss settlement and the lienholder receives the ACV payout, the remaining loan deficiency is typically the responsibility of:
Answer: The borrower, unless GAP coverage is in place
Without GAP, the borrower remains personally liable for any deficiency balance after the primary insurer's ACV payment satisfies the lienholder.
Which of the following is an example of risk reduction (loss control) rather than risk transfer?
Answer: Installing anti-theft devices on a vehicle
Anti-theft devices reduce the probability of vehicle theft, which is a loss-control (risk reduction) strategy, not a transfer strategy.
The 'law of large numbers' is important to insurance pricing because it:
Answer: Allows insurers to predict losses more accurately across a large group
As the number of insured units grows, actual loss experience converges toward statistically expected values, improving pricing accuracy.